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What Christmas trading tells us about retail

After a tough 2019, the Christmas period provided a few hints about the future of the sector
What Christmas trading tells us about retail

“Can it really be my duty,” lamented author CS Lewis in 1957 “to buy and receive masses of junk every winter just to help the shopkeepers?” His words seemingly echo the thoughts of UK consumers, who visited the shops in decreasing numbers during the holiday period. This was largely expected after a tough year, but what do the myriad trading updates tell us about the health of the sector? And are things finally looking up?

For those who have been following the troubles in the retail sector in recent times, several of the themes that influenced trading will be familiar. Many management teams – whether at general retailers or supermarkets – took the opportunity to highlight the challenges the current business rates system creates for the sector. This was illustrated most starkly by ShoeZone (SHOE), which published figures reflecting its business rates burden. In the 10 years since 2009, the group’s store estate has decreased by 38 per cent to 500, its sales have fallen 30 per cent to £185.8m and its rents have fallen by almost half, to £20.4m. Nevertheless, the business rates the group pays have increased by 7 per cent to £11.1m, accounting for 6 per cent of sales and more than half of rent.

Heading into the Christmas period, expectations for the sector were poor. Declining footfall and rising costs in the form of wages have been weighing on retailers. This, combined with the growing role of online shopping and a general election on 12 December, all threatened performance. What’s more, consultancy Deloitte noted that average pre-Christmas discounting across retail had reached 43.8 per cent – something that could, presumably, knock margins. 

In the event, things played out broadly as expected – save a few shocks, such as Joules (JOUL). True, it was a bad 12 months – the British Retail Consortium branded 2019 the “worst year on record” for British retail. The BRC’s data showed a 0.1 per cent decrease in total sales over the year, although they rose 1.7 per cent on a like-for-like basis compared with December 2018 thanks to the late timing of Black Friday.

“You haven’t really seen a cratering of the sector multiple as a consequence of the sort of news that has been ebbing out,” said Jonathan Pritchard, a retail analyst at Peel Hunt. “The forecasts are pretty much on the floor, so if you come in with bad numbers against very low expectations, it doesn’t necessarily have the effect on the shares that an out-of-a-clear-blue-sky disappointment does.”

Still, those hoping for some relief in the trend for negative footfall were disappointed, as data from retail data company Springboard showed a 2.5 per cent overall decline in the five weeks from 24 November to 28 December. Diane Wehrle, insights director at Springboard, said declining traffic was to be expected on a year-on-year basis, but that the drop itself was especially pronounced.

“It wasn’t unexpected that footfall would drop. It drops in most months of the year, from year to year,” said Ms Wehrle. She added, however, that the size of the contraction in December was “at the higher end”.

Food sales carrying the supermarkets

The UK-listed supermarkets all report Christmas trading slightly differently, with specific periods varying widely – WM Morrison’s (MRW) update, for example, covered the 22 weeks to 5 January, while Tesco's (TSCO) covers the 16 weeks to 4 January – and differing levels of granularity in trading, making it difficult to make direct comparisons. However, in spite of a somewhat uneven dataset, there was a clear divergence in the performance of groceries and general merchandising, with the latter coming off considerably worse.

Where in many cases grocery was broadly flat, appetite for general merchandise fell. Marks and Spencer (MKS) reported like-for-like sales growth of 1.4 per cent in food – albeit hampered somewhat by supply chain and waste issues – but saw sales in its clothing and home division fall 1.7 per cent. J Sainsbury (SBRY) managed 0.4 per cent growth in food, but general merchandising fell 3.9 per cent.

 

Trading at supermarkets was broadly flat

CompanyUK like-for-likes (%)Period
Sainsbury-0.7

15 weeks to 4 January

Tesco0.4

19 weeks to 4 January

WM Morrison-1.7

22 weeks to 5 January

Marks and Spencer Group plc0.2

13 weeks to 28 December

Waitrose0.4

7 weeks to 4 January

Source: Company results

Dr Clive Black, head of research at broker Shore Capital, said that the challenges in general merchandise reflected a shift in consumer behaviour towards sustainability and well-being.

“Well-being and sustainability cover a wide spectrum of products, but in essence they both mean less… they tend to mean higher quality nutritional intake and they tend to mean lower inputs and fewer outputs.”

He argued this was also reflected in giftware, with increased interest in higher-quality products, but a turn away from profligate spending, noting an uptick in cashmere woollen gift sales at Marks and Spencer, while the wider gifting division underperformed. This thesis would seem to be borne out by the strong performance from top-end department store Fortnum & Mason, which reported like-for-like sales growth of 13 per cent over the Christmas period.

“We think this is structural. We think this is going to be ongoing and therefore for the plastic toy industry [...] for products that don’t have a purpose, for products that don’t tick those well-being and sustainability boxes, they face a lot of strategic rethinking.”

Data from Kantar Worldpanel showed that, in spite of Deloitte’s forecasts of higher promotions for the wider retail sector, discounting among the grocers remained broadly in line with last year – with 33.6 per cent of products on promotion in December 2019, versus 33.7 per cent in the previous year.

Matt Botham, strategic insight director at Kantar Worldpanel said the UK grocers had been moving away from their previously high levels of discounting since 2015 in favour of lower prices overall

In spite of this, analysts speculated that the strong performance reported by discount supermarkets Aldi and Lidl was down to deep discounting. Aldi reported sales growth of 7.9 per cent for the four weeks to Christmas Eve, while Lidl reported 11 per cent growth for the four weeks to 29 December. As private companies, both groups reported figures at their own discretion, neglecting to include like-for-likes or margins. 

 

Tough times for clothing and general retailers

Promotional activity took much more of a toll on some of the general and clothing retailers. Superdry’s (SDRY) turnaround story was dealt a blow when management reported that “unprecedented levels of promotional activity”, combined with poor consumer demand and efforts to drive down stock in some lines, had made trading tougher, leading management to guide to underlying pre-tax profits of between zero and £10m for the full year. It was not the only downgrade to profits in the sector, with Card Factory (CARD) and Joules (JOUL) also warning.

Prior to Christmas, Superdry’s management had sounded a confident note following the group’s “strongest Black Friday ever”. However, the sales event – which comes after Thanksgiving in the US – fell in December this year rather than November as it usually does. This served to weaken the rest of the holiday trading period.

“Footfall rose on Black Friday by 3.3 per cent [on the previous year] and that brought Christmas trading forward,” said Ms Wehrle. “People spent in the first week particularly, but also over into the second week… But then footfall fell away in the second half of the month quite substantially.”

As ever, the shift towards online retail was evident, with Boohoo’s (BOO) sales performance and subsequent guidance upgrade prompting its share price to reach record highs, ultimately eclipsing Marks and Spencer in market capitalisation terms.  

It wasn’t just the pure-play online retailers that benefited from the continued growth in online retail, though. Sales growth in Dunelm’s (DNLM) recently overhauled online platform rapidly outpaced the growth of in-store sales, and supermarkets Tesco and Sainsbury both reported strong online growth.

 

Could things be looking up?

After the year the retail sector has had, some are taking the view that the only way it can go from here is up. Indeed, the KPMG/Ipsos Retail Think Tank is predicting growth of “at least” 1 per cent in the coming year, as post-election clarity on the political landscape feeds through to higher consumer confidence and spending. 

The think tank predicted that the grocery sector would continue to struggle, as shoppers opt for more convenience spending and home delivery. However, Mr Botham said things could start looking up, Brexit permitting, noting that the sector was no longer facing the tough comparator of 2018’s Football World Cup and summer heatwave, adding that the 2020 UEFA football tournament could even provide a boost.

“You’re not facing into the same headwinds that we were seeing through 2019,” he said.